Probe of Dewey's Collapse Intensifies

By

Jennifer Smith And

Reed Albergotti

Updated Oct. 9, 2012 10:51 a.m. ET

Prosecutors in Manhattan are investigating whether top managers at Dewey & LeBoeuf LLP purposely misled lenders about the law firm's financial health, as a criminal probe into the firm's failure intensifies, according to people with knowledge of the investigation.

Investigators also are looking into whether the law firm's leaders made false statements to former partners about Dewey's progress repaying loans on their behalf, according to a person briefed on the probe.

The Manhattan district attorney has sent subpoenas in recent months to Dewey and at least one of its lenders seeking information relating to communications Dewey's leaders had with banks and former partners, according to people with knowledge of the investigation. Prosecutors have also met with Dewey's bank lenders, according to one of these people.

A key issue in the probe of the largest law-firm failure in U.S. history is whether former Dewey chairman
Steven Davis
or other leaders of the firm intentionally made misstatements that violated state laws, such as those that prohibit the keeping of false business records, according to one person briefed on the probe.

Key Events for Dewey

The investigation, which began about five months ago on the eve of the New York-based firm's collapse, is still in its early stages and may not result in the filing of any criminal charges.

Barry Bohrer,
a lawyer for Mr. Davis, didn't respond to a request for comment. But Mr. Bohrer previously has said that, "Every action of Mr. Davis as chair of the firm was taken in good faith and in the best interests of the firm."

Dewey filed for protection under Chapter 11 of the Bankruptcy Code on May 28 after a wave of partner defections spurred largely by compensation disputes and concern about the firm's finances. At the time of its collapse, the firm—which at its peak had more than 1,300 lawyers in offices across the globe—owed at least $315 million to banks, bondholders and other creditors. Subsequent claims filed in federal bankruptcy court could bring the total to about $560 million.

Mr. Davis was stripped of his leadership roles at Dewey in April, after the firm learned of the criminal investigation. He told his partners in an email at the time that he hadn't engaged in any misconduct.

A major focus in the continuing probe is on statements made by Dewey's leaders to a bank syndicate with which the firm had a $100 million revolving line of credit, according to the person briefed on the probe. The agreement with a consortium of lenders, led by
J.P. Morgan Chase
& Co., expired earlier this year, and the firm's managers were trying to extend it in the months leading up to Dewey's demise.

It isn't clear what time period prosecutors are examining.

Two people familiar with Dewey's finances in recent years said that they doubted that managers had engaged in criminal behavior, and said that lenders had always been given the firm's audited financial statements.

The other focus of the district attorney's investigation, according to the person briefed on the probe, is on bank loans that some former Dewey partners took out from
Barclays
PLC's corporate-banking division to buy equity in the firm, a common practice at large law firms.

When those partners left, Dewey was supposed to return their capital by paying down the balance of the loan, which, as previously reported by The Wall Street Journal, the firm had struggled to do.

Last year Dewey told some former partners that the firm was making payments on the principal of the loans. But in some cases the firm had only paid down the interest, according to ex-partners and a person with knowledge of the repayment schedule.

Janis Meyer,
Dewey's general counsel, acknowledged the discrepancy and promised to rectify the situation in a February 2012 email reviewed by the Journal. Ms. Meyer declined to comment further on Monday.

The firm's collapse in May means those ex-partners could be on the hook for whatever portion of the loans hasn't been repaid. In some cases the sums come to hundreds of thousands of dollars.

Dewey's bankruptcy advisers said at a hearing last month that, based on conversations with former partners, any civil claims relating to the firm's demise would most likely be brought against Mr. Davis, former executive director Stephen DiCarmine and former chief financial officer
Joel Sanders.

A lawyer representing Messrs. Davis, DiCarmine and Sanders in the bankruptcy proceedings said his clients weren't responsible for the firm's collapse, and that no evidence proving their culpability had yet been presented.

"As far as we are concerned they didn't do anything wrong civilly—and they certainly didn't do anything wrong criminally," said their lawyer,
Ned Bassen
of Hughes Hubbard & Reed LLP. Mr. Bassen said his clients haven't been contacted by prosecutors regarding the criminal probe.

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